Why Americans don’t have offshore bank accounts

Adam Davidson uses his NYT Magazine column to weigh in on the subject of offshore tax havens this week, and delivers something very peculiar. "
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Adam Davidson uses his NYT Magazine column to weigh in on the subject of offshore tax havens this week, and delivers something very peculiar. His initial conceit is reminiscent of Dennis Berman’s attempts to set himself up as a pre-IPO Facebook investor, only without the deceit:

Earlier this month, I decided to see how hard it would be to set up my own offshore bank account. I figured it would be pretty difficult, because I’m not rich and don’t have a team of tax lawyers to oversee my money and because the E.U. and U.S. governments have been cracking down on tax havens by imposing stricter tax-sharing requirements.

You know how this is going to end: Davidson ends up concluding, in the first of his “deep thoughts this week”, that “it takes 10 minutes to open an offshore account”. But, by his own account, that isn’t really true. He did end up talking on the phone — surely for more than 10 minutes — to someone who said that in return for $1,500 or so, he could set up a Belizean company with a bank account in Singapore. It’s not at all clear whether Davidson actually ended up creating the Belizean company or its Singaporean bank account, although it is clear that in addition to the phone call, Davidson had to get notarized copies of his passport, driver’s license, “and some other identity documents”, and then email them to A&P Intertrust, a company in Canada.

More to the point, Davidson didn’t incur any of the really big expenses involved in setting up an offshore account, most of which come in the form of legal and accounting advice. As Davidson writes:

Setting up an account may be easy, but managing one is expensive. Following the law requires a team of lawyers and accountants to carefully monitor tax laws in dozens of countries and maintain accounts that stay on the safe side of confusing rules. It’s not really worth the cost for anyone other than wealthy investors looking to put aside money, tax-free, for future generations. Or for large multinationals who prefer to centralize their global cash-flow stream in a place that doesn’t tax corporations or require a lot of financial reporting. Why would a huge company like G.E. want to pay U.S. taxes every time its Spanish subsidiary sells parts to a company in Belarus when it could avoid them by incorporating offshore?

This is entirely true. If you’re a US citizen and you intend to spend your money in the US at some point, there’s very little reason to set up an offshore account. And even if you’re saving for your heirs, if they end up spending the money in the US, then they’ll probably have to pay full income tax on any money they bring in from overseas. What’s more, given demographic and fiscal realities, the income tax they pay might be significantly higher than it is today.

So why would Adam Davidson or anybody else ever want an offshore bank account? He cites laws saying that information about the owners of such accounts is not public and is would not be available even to the Belizean or Singaporean governments. And he talks about how difficult it would be for the IRS to investigate such arrangements. All of which is a polite way of saying that if you intend to break the law, there’s a good chance that you won’t get caught. (Although, tell that to the thousands of Americans who held money in Swiss accounts at UBS, and then saw their details handed over to the IRS.)

The IRS also doesn’t really need to be able to investigate all those bank accounts directly, most of the time: all they need to do is ask the account holder directly. If Adam Davidson were ever audited by the IRS, they would ask him for a list of all of his offshore accounts — and if he had any sense at all, he would give it to them.

While it’s true that people are more likely to break the law if they think they won’t get caught, there’s no way that changing US law is going to alter that. The attraction of offshore accounts isn’t a function of US law, really, so much as it’s a function of the fact that such accounts are opaque to US tax authorities. And it’s really hard for the US Congress to unilaterally pass a law which suddenly allows the IRS just as much access to an account in Singapore as they have to an account in Des Moines.

Still, they’re trying, with something called the Foreign Account Tax Compliance Act, which puts a lot of transparency responsibilities onto any foreign financial firm with American account holders. And weirdly, Davidson isn’t a fan of the act:

The move is very unpopular among foreign banks, governments and Americans living abroad, but the more complex rules could actually mean more business for offshore centers. By the time Fatca is in full force, in 2017, truly wealthy individuals and corporations will almost certainly have used their resources to find more intricate loopholes.

Instead, he says:

My colleagues at NPR’s “Planet Money” recently polled several economists of all political stripes and found that while they disagreed on the right level of taxation, they generally agreed that the overly complex taxation of rich people and corporations was disastrous. It all but guarantees that those people and companies will spend an inordinate amount of money figuring out how to game the system rather than come up with new ideas that improve the economy. Economists generally agree that the best tax system would be simple and strict, offering little incentive to lobby for loopholes. The big problem, of course, is that many of the people and corporations with the most influence over Congress don’t want it that way.

And this is where I get very confused, since it’s not at all clear what Davidson is calling for here. The third of Davidson’s “deep thoughts” is that “it would be better if the rules were simpler” — but how would it be better? By those lights, today’s rules are better than the rules which are going to be in force in 2017, just because they’re simpler. And it seems to me, at least when it comes to US individuals, that we already have a simple system. You have to pay taxes on your global income, including investment income, wherever those investments are in the world.

As a result, by all accounts, Americans have much less money in offshore bank accounts than citizens of most other countries. Reliable data on such things is impossible to come by, of course, but all of the numbers in Davidson’s piece are trying to measure a total amount in offshore centers, rather than the amount that can credibly be considered to be American in some way.

And while it’s true that American companies have a lot of money offshore, substantially all of those companies are multinational, and they would have to have many international bank accounts no matter what the rules said.

As far as US individuals are concerned, no one has yet demonstrated to me that there’s some kind of pandemic of rich people opening offshore accounts. In England, where I come from, it’s reasonably commonplace for individuals to have bank accounts in Jersey. And in Germany, likewise, lots of middle-class families keep money in Luxembourg or Liechtenstein. But in the US, by contrast, I see no day-to-day indication that offshore accounts are a remotely common tax-avoidance strategy.

Insofar as there is a problem, it seems to me, the problem is with tax collection and enforcement, rather than with the complexity of US tax legislation. Yes, the US tax code is ridiculously complex, and riddled with loopholes which ought to be abolished. But I think it’s actually pretty good when it comes to individuals’ offshore assets. And it’s only going to get better as Fatca comes in to force.